Even the most meticulously drafted termination clause may not save an employer from liability if it fails to act in good faith
Like any failed relationship, the wake of a termination is often rife with animosity and resentment. Emotions run high, accusations fly and common sense is thrown to the wind. But unlike other relationships, at the end of employment, there exist stringent behavioural requirements that, if not met, can cause ruinous financial and reputational consequences.
The recent Ontario Superior Court of Justice decision in Humphrey v Menē lays bare the high standard of conduct expected of employers and the risks associated with an unjustifiably aggressive or dishonest approach to litigation. This case should remind employers that their conduct, during and after termination, will be closely scrutinized.
Jacqueline Humphrey’s tumultuous relationship with jewelry maker Menē Inc. began in 2016. She held various roles and, in 2018, was promoted to chief operating officer. In early 2019, Humphrey wrote to her CEO asking for a salary review. Much to her surprise, he responded by advising that in light of a recent investigation into performance issues, she would be removed as COO, suspended with pay for two weeks, and the company would then decide whether to terminate or demote her.
Humphrey was ultimately terminated with cause. Menē’s reasons included several vaguely defined performance issues, one of which was that she once had a single glass of wine with lunch.
Menē dropped its cause allegations almost a year into the litigation, claiming that the evidence supporting its allegations was destroyed. That turned out to be a very costly decision. It is not uncommon for employers to assert cause and then abandon those allegations partway through a wrongful dismissal suit. Often, this change of tack is followed by a settlement. But Menē’s choice to pursue the matter on the basis of a without cause termination resulted in Humphrey being awarded more than $150,000 in damages, and likely tens of thousands of dollars in legal fees.
Where exactly did Menē go wrong? In brief, it subjected Humphrey to a toxic workplace, embarrassed and humiliated her before her co-workers and clients, significantly exaggerated her performance issues, and it knew, or should have known, that it didn’t have any evidence to support the alleged cause for dismissal.
The consequences of Menē’s actions were severe. Justice Gina Papageorgiou found that even if the termination clause in Humphrey’s contract was perfectly drafted and enforceable, she would not allow Menē to rely on it, because it had repudiated the entire contract through its conduct. This finding was grounded in Menē’s failure to act in “good faith,” that is, the legal presumption that contracting parties will deal with one another honestly and fairly. The concept was reaffirmed by Canada’s highest court in a case I argued in late 2020, Matthews v Ocean Nutrition Canada Ltd., which was relied upon in the Mené decision.
This is an extraordinary remedy. Ordinarily, a finding of repudiation (for example, a constructive dismissal) will not disentitle an employer from relying on an otherwise lawful termination clause. Absent this finding, Humphrey would have only been owed her entitlements, around $2,300, under Ontario’s Employment Standards Act. She was ultimately awarded $82,500 in damages for wrongful dismissal and $75,000 in aggravated and punitive damages. That could have easily been avoided had the company gone about terminating her in an honest manner.
This case places yet another weapon in employees’ arsenal upon dismissal. After Menē, even the most meticulously drafted termination clause may not save an employer from liability if it engages in conduct that significantly departs from the standard of good faith. I anticipate that we will see an uptick in this sort of claim in the coming years, with employees increasingly arguing that even if their employment contract is enforceable, they are entitled to damages for wrongful dismissal because their employer mistreated them at the time of termination. Employers should be aware of this risk and govern themselves accordingly.
My advice is simple: the easiest way to avoid ending up in a situation such as Menē’s is to carry out terminations honestly and avoid allowing bad blood to get in the way of common-sense decisions. The standard is not perfection. Minor or technical breaches and honest mistakes will not increase the risk of having a termination provision thrown out. This, of course, is contingent upon those provisions being properly drafted, a feat that few employers can achieve without the assistance of experienced counsel, based on a raft of other recent jurisprudence. It is, therefore, essential that employers ensure their contracts are watertight and keep a close eye on developments in the law of bad faith, which, thanks to the Matthews decision, will likely be a topic of ever-increasing importance in employment law.